Another new focus is what gaming execs call the “casual” market. It’s a loose term covering simple games that anyone can pick up and play, such as sports simulations played with the Wii console’s motion-sensitive controller. The market has introduced new consumers to the industry. Casual gamers might be put off by the array of buttons on a normal console controller but, as Tippl says, “everybody knows how to swing a tennis racket.” Activision’s hit here is Guitar Hero, a franchise it acquired when it bought publisher RedOctane in 2006. Players press buttons on a plastic guitar (sold with the game) in time with on-screen prompts. The franchise has brought in more than $1 billion of revenue, and this year the company released a new title in partnership with rock group Aerosmith, as well as a version designed for Nintendo’s handheld DS console.
Casual gaming has also been a hit at Ubisoft, a 22-year-old, €928m French publisher and developer. According to Alain Martinez, Ubisoft’s CFO for the past eight years, a big attraction is the cost of making such games: a casual game made for the DS, for example, has far lower development costs than a game for the PS3 or Xbox 360, allowing Ubisoft to experiment in ways it couldn’t afford to do on other consoles. “If a game costs €500,000 [to make] instead of €15m, you can make 30 games for the price of one and try different things,” Martinez says. Last year, revenue from Ubisoft’s casual business, Games for Everyone, increased to €230m from €70m, and Martinez says the division boasts an average contribution margin of more than 30%.
That kind of growth has made Ubisoft a sturdy performer. When Martinez joined the company, annual revenue was less than €200m. It’s now the third-biggest independent publisher after Activision Blizzard and EA by market cap, and expects to pass the €1 billion revenue mark this year. Edward Williams, an equity analyst in the New York office of BMO Capital Markets, says the board has done “a phenomenal job of growing their business” and calls the company “a core holding for the cycle.”
Like Activision Blizzard, Ubisoft’s focus is on size, which in turn allows it to make more titles. In 2000 the company owned only one brand, while today it has 14 multi-million selling franchises, with more on the drawing board. “The cost of development and the ambition of these projects are getting higher all the time,” says Martinez. “Therefore fewer companies are capable of taking risks on several projects like we do.”
Ubisoft has 3,500 developers working in 19 studios in 15 countries, many in regions where the company benefits from lower investment costs, such as Romania, Morocco and China. In June it announced plans to open a 20th studio in Sao Paulo. As for development and production costs, Martinez says the company can spend €300m each year. But despite its ambitious plans, last year the company managed to cut R&D spend to 28% of sales from 34%, thanks to such strong sales figures.